Latest results on fractal breakout backtest

I just finished the backtest on the USDCAD.

 

This pair would've been horrific if you tried to trade fractal "breakouts" naked. The USDCAD loved to range and retrace, especially after 2006.

 

If you tried to trade fractal breakouts without any filters, expectancy would've been very low or moderately negative as you increased your R:R.

 

I decided to apply an ADX(14) filter to see how it could be used to improve my trades. My original thought was that a higher ADX would improve expectancy since it would indicate a trending market.

 

In fact the opposite occured. Expectancy significantly improved if I traded breakouts when ADX(14) was less than 18. To ensure I wasn't merely curve-fitting, I applied a ADX(14) < 18 filter on the AUDUSD and EURUSD backtest results and found similar improvement.

 

What does this mean? During trending conditions, I suspect that fractals will start appearing at the beginning of a range / consolidation period. So if you try to trade a fractal break when ADX(14) is high, the trend would be fading and you'd lose. This might make a good exit signal in another system. 

 

On the otherhand, when ADX(14) < 18, the market has been strongly ranging for a period of time. Stops would've accumulated outside the range, so a breakout has much more "thrust" when it finally occurs.

 

A 2.67 R:R still provided the best overall ratio, with an expectancy of 39% after spread cost. There were around 190 trades between 2001 and 2011 where ADX(14) < 18. I'm not happy with this sample size and will obviously continue my backtest with more pairs.

 

As of to date, here is my equity curve for this system:

 

 

50% ATR backtest on USDCAD

Below is the equity curve for the USDCAD from 2001 to mid-2012, using a 1.67:1 R:R ratio, 2% risk and a $10,000 initial balance.

This is from using my daily range < 50% ATR(14) breakout system. Expectancy was 24.1% after 123 sample trades, which is acceptable.

28th March 2012 - closed second order on USDCAD for minor win

Price on the USDCAD continued to retrace up past support level #1. When price moved to within 10 pips of my stop loss, I decided to close the order and salvage a minor win. The return from my second order is 13%.

Possible lesson: take-profit at the first support/resistance.

27 March 2012 - closed GBPNZD in profit

GBPNZD

I decided to close my trade on the GBPNZD after I identified a potential support zone that I had missed earlier. A doji formed around here so I decided to close the trade. My return was 29%. I need to pay more attention to possible support and resistance zones. As you can see in the chart below, my original TP would have provided an excellent risk-reward ratio.

USDCAD

As mentioned in the previous entry, I decided to short the USDCAD and split my trade into two orders, with the first TP at support level #1 and second TP at support level #2. My first TP was hit and I've moved my stop loss for the second order to slightly above breakeven, so whatever happens, this trade is now a win.

At the moment, price has slightly retraced, but price has already broken through support level #1 so this level should now act as resistance.

26th March 2012 - win on USDCAD, GBPNZD still in play

I'm not going to post my setups in this blog entry as I don't have much time. I'm currently live in two trades - the USDCAD and GBPNZD. I've taken profit on half of my order on the USDCAD and moved the rest to breakeven, so this is a win.

GBPNZD is in profit but hasn't moved much in either direction today. There's alot of scope for profit, so this trade may take awhile to conclude.

27th Feb 2012 - USDJPY hits TP

This was a textbook trade. My pending long on the USDJPY was triggered on Friday as resistance from August 2011 broke and the pair entered a bull run. It hit my take-profit target today before bouncing off resistance from July 2011. Profit = 99 pips.

USDCAD

I saw an inside bar form in the USDCAD, but price action over February looked pretty ugly. Price WILL breakout, but there's alot of potential to get whipsawed in an undecisive market before then, so I decided to sit this one out. 21 EMA looked very flat too.

Three black crow backtest continued - USDJPY 2000-2009

I spent the latter half of today backtesting the USDJPY from the years 2000 to 2009, using the same three black crow / three white soldier candle pattern I identified in the previous post.

The results aren't quite so positive. A reward-to-risk ratio of 2 provides a meek positive return on risk, and higher reward-to-risk ratios return negative results. I've provided a comparison between the USDCAD and USDJPY below.

Overall, I would say that this strategy is viable with a reward-to-risk ratio of 2. Because of such a large stop loss, this strategy will require you to keep your trades open for weeks to provide a 2x reward.

Three black crows / three white soldiers backtest: USDCAD 2000-2009

I just finished a backtest on the three black crow / three white soldier candle pattern. This candle pattern is quite basic. It consists of three consecutive bearish or bullish candles. Three black crows represent a bearish pattern as seen below, while three white solders are the complete opposite (bullish).

The three candles must be of the same "colour" for it to be considered 3BC or 3WS.

For this backtest, I focused on the USDCAD pair with a 21 EMA to measure the trend. The years 2000 to 2009 were tested, as well as the first half of 2010. I thought about extending the backtest all the way to 2011 but too many orders would've been left open by the end of the backtest.

Stop loss will be located at the start of the first candle, and entry will be triggered at the break of the third candle.

RESULTS

Trading with the trend yielded superior results. In order to prevent cluttering of this post. I'm not going to bother posting the results of trading against the trend.

Final results have been tabulated by year and R:R ratios and are displayed below. 99 trades in favour of the trend were initiated.

Those are nice results. Trading with a reward-to-risk ratio of 6 would have yielded a beautiful average return of 50% on risk. However, that isn't a number that I'm comfortable using. A reward-to-risk ratio of either 2.5 or 3 seems ideal for me.

I'll backtest another currency pair to validate these results.